In an effort to combat bloated government spending in the state, Gov. Rick
Snyder wants to provide incentives for municipalities to consolidate.
By combining local units of government, Gov. Snyder is hoping to create
economies of scale and reduce expenditures. But before Michigan charges ahead
on a consolidation crusade, a look at the research on the topic is in order.

Numerous studies investigating the putative cost-savings of municipal
consolidation show mixed results. In 2009, at the behest of a state commission
studying local government in New Jersey, Rutgers’ School of Public Affairs and
Administration undertook a literature review of various consolidation
studies. Among other conclusions, the report warns that even though “there is
some support for reducing the number of governments” via consolidation, “there
is a considerable body of literature that does not support consolidation.” For
example, the report discusses the absence of efficiency gains in Australian
and Canadian municipal consolidations in the
1990s.

Cost-savings from consolidation may seem to make sense, but there are
several reasons why merging municipalities may not save as much money as some
suggest. A study analyzing consolidation in Georgia
reviews some of the overlooked costs involved in the process. Exclusion of
one-time “transitional costs,” such as expenditures for consolidation
consultants or new buildings for a larger workforce, can cause the full costs
of consolidation to be underestimated.

Another consideration, highlighted in a Syracuse University report, is the phenomenon of “leveling up.”
For example, a particular township employee might earn $50,000 per year before
a merger, while the corresponding city employee might earn $70,000 per year.
After consolidation, if the township employee’s salary increases to $70,000 as
well, the new municipality will have higher compensation costs.

Leveling up can also occur with services. Using the city-township example,
the more robust snowplowing schedule of the city might be extended to include
the township roads as well, again raising total costs. As the experience of
Detroit attests, larger government does not necessarily mean cheaper government.

Research on the cost-saving potential of municipal consolidation is best
described as highly variable and contradictory. In fact, the only real
conclusion one can draw from the many studies on the subject is that there is
no conclusion. The Syracuse University report summed up this reality, stating:
“Policy makers should not expect any dramatic cost savings from consolidation
and should avoid using the argument of cost saving as the main benefit of
reform.” Overall, much of the literature on consolidation ends with a proviso
declaring mixed results and calling for further research on the topic.

The belief that efficiency gains from consolidation lead to cost-savings
assumes that government adheres to a “demand-driven” model of operation. This
theory treats government like a corporation that seeks to increase efficiency
and cut costs. The demand-driven thesis, however, is not an accurate model for
school district consolidation, according to a Mackinac Center report
by Andrew J. Coulson. In his study, Coulson also tested “public choice” theory,
which argues that public officials ultimately seek to advance their own
interests. In the public choice model, such officials attempt to accumulate and
spend as much money as possible in an effort to enhance their influence and
power. Coulson found that the data provided “compelling support” for the public
choice theory, noting that the “incentive structure” of public schooling
encourages districts “to maximize their budgets.”

Although no one appears to have tested public choice theory vs.
demand-driven theory in municipal consolidation, local municipal officials
would likely behave in the same way as school officials: seeking more money
rather than cutting costs. Some public choice theorists argue that the very
existence of fragmented units of government creates competition among
municipalities, which can increase public-sector efficiency. In such a
structure, residents serve as consumers by voting with their feet and moving to
more efficient and responsive municipalities.

Ultimately, consolidating municipalities to save money is dubious. There
are other alternatives for reining in out-of-control government spending, such
as bringing public-sector benefits in line with the private sector and privatizing
services. These options reform government incentives instead of
re-structuring the public sector to mirror a corporation.

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C. Jarrett
Dieterle is a 2010 graduate of the University of Richmond and a summer intern
with the communications team at the Mackinac Center for Public Policy, a
research and educational institute headquartered in Midland, Mich. Permission
to reprint in whole or in part is hereby granted, provided that the author and
the Center are properly cited.